Qantas offer gets ludicrous

A report by Terry McCrann in the Courier Mail yesterday says that Qantas chair Margaret Jackson has now given essentially two reasons for her enthusiastic endorsement of the private equity takeover bid for the airline, with neither standing up to serious scrutiny.

The report goes on to say, in any event, the two reasons do not justify the company’s failure to provide shareholders with all the information they are entitled to get to make their own informed decision on whether to accept.

Last Friday’s reluctant update, suggesting a significant improvement in Qantas’s trading and its prospects, was completely inadequate.

All it did was indicate that shareholders are being encouraged to accept a price that is pitched about the same level at which Air New Zealand is trading in the market.

The “independent expert” who assessed the takeover, Grant Samuel, proffered a number of reasons why Qantas was worth significantly less than its peers such as Singapore or Cathay, which came down to the others having better growth prospects and being a “hub” operator as against an “end of line” airline.

Even if that is true, it does not explain the Qantas/Air NZ comparison. Air NZ is the same sort of airline, but immeasurably weaker, more exposed and with lower growth prospects.

Yet, as Grant Samuel notes, in late January Air NZ was trading on a multiple of 13.6 times estimated 2007 earnings.

The $5.45 offered for Qantas is a multiple of about 13.3 times what are now the likely 2007 earnings, based on the Grant Samuel analysis and Friday’s profit upgrade.

There is no way that I can accept any suggestion that a takeover price for Qantas, which would purportedly include a 20-30% takeover premium, should be less than Air NZ’s normal trading price on the market.

That is completely ludicrous.

Yet Jackson all but demands recalcitrant shareholders accept, because hedge funds now hold about 40% of the stock and the sharemarket would have to find $4 billion to $5 billion of equity to replace them.

To suggest that would be “a problem” is as silly as Prime Minister John Howard’s claim that taking $3 billion out of the Future Fund would all but bankrupt the country.

The world is awash with tens of billions of dollars of money looking for something to buy.

That is exactly why the private equity groups are going after Qantas, Coles and who knows what else!

Specifically those institutions that have sold to the hedge funds above $5 would be quite happy to buy their Qantas shares back and make a nice little hedge fund-style profit on the turn.

Will the share price drop if the takeover fails? Possibly. How far? Who knows. And, indeed, for how long?

It could well settle at a much higher price than where it traded last year.

That’s in line with the higher prices at which all airlines are now trading compared with December when the board and its advisers grabbed the (original) $5.60 too hurriedly.

Indeed, the Qantas share price could even rise, because if the bidders were rational they would come back with a higher offer.

Now Jackson also raised the concerns of its $13 billion aircraft re-equipment program and greater competition from Tiger and Virgin.

Yes, the competition possibilities demonstrate that it doesn’t have a free ride to higher and higher profits. But it had to – and still has to – spend the $13 billion irrespective of who its shareholders are.

Considering that Virgin, which is barely a quarter its size and lacks its market dominance and regulatory advantages, has happily embarked on a $2.6 billion program, methinks that issue is somewhat overstated.

Report by The Mole from Terry McCrann in the Courier Mail